Working Papers

Current Expected Credit Losses and Consumer Loans, with Joao Granja,

R&R at Journal of Accounting & Economics

We use data from TransUnion, a large U.S. credit bureau covering millions of individual consumer loans, to examine the transition to the Current Expected Credit Loss (CECL) accounting standard and its effects on banks' loan pricing and lending decisions. We find no indication that the incremental loss reserve requirements of originating a new loan under the CECL standard prompted banks to increase interest rates or to ration loan sizes to consumers. We find identical results when we exclude the months around the Covid-19 pandemic and when we restrict our attention to the group of banks with lower levels of regulatory capital. Our results are of potential interest to the ongoing policy debate between standard setters and members of the financial industry around the potential effects that CECL might have on access and price of credit.

We show how to measure the welfare effects arising from increased data availability. When lenders have more data on prospective borrower costs, they can charge prices that are more aligned with these costs. This increases total social welfare and transfers surplus from borrowers to lenders. We show that the magnitudes of the welfare changes can be estimated using only quantity data and variation in prices. We apply the methodology on bankruptcy flag removals and find that removing prior bankruptcy information substantially increases the social surplus of previously bankrupt consumers, at the cost of a modest decrease in total allocative welfare. We show how the framework can be extended to incorporate adverse selection and imperfect competition.